Hackett Group, Inc.: Form 10-Q for the period ended Apr 1, 2022

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding our expected financial position and operating results, our business strategy, our financing plans and forecasted demographic and economic trends relating to our industry are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” or “intend” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. We cannot promise you that our expectations reflected in such forward-looking statements will turn out to be correct. Factors that could impact such forward-looking statements include, among others, the impact of the coronavirus (COVID-19) pandemic and our ability to mitigate or manage disruptions posed by COVID-19 pandemic, changes in worldwide and U.S. economic conditions that impact business confidence and the demand for our products and services, our ability to effectively integrate acquisitions into our operations, our ability to retain existing business, our ability to attract additional business, our ability to effectively market and sell our product offerings and other services, the timing of projects and the potential for contract cancellation by our customers, changes in expectations regarding the business consulting and information technology industries, our ability to attract and retain skilled employees, possible changes in collections of accounts receivable due to the bankruptcy or financial difficulties of our customers, risks of competition, price and margin trends, foreign currency fluctuations, the impact of the geopolitical conflict involving Russia and Ukraine on our business and changes in general economic conditions, inflation, interest rates and our ability to obtain additional debt financing if needed. For a discussion of risks and actions taken in response to the COVID-19 pandemic, see “Our results of operations have been adversely affected and could in the future be materially adversely impacted by the coronavirus pandemic (COVID-19)” under Item 1A, “Risk Factors” of our Annual Report on Form 10-K. An additional description of our risk factors is described in Part I – Item 1A, “Risk Factors”. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Many of the risks, uncertainties and other factors identified in our Annual Report on Form 10-K for the year ended December 31, 2021 have been amplified by the COVID-19 pandemic.

OVERVIEW

The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of Hackett. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to our consolidated financial statements included in this Quarterly Report on Form 10-Q.

The Hackett Group, Inc. (“Hackett” or the “Company”) is a leading IP-based strategic advisory and technology consulting firm that enables companies to achieve world-class business performance. By leveraging the comprehensive Hackett database, the world’s leading repository of enterprise business process performance metrics and best practice intellectual capital, our business and technology solutions help clients improve performance and maximize returns on technology investments. Only Hackett empirically defines world-class performance in sales, general and administrative and certain supply chain activities with analysis gained through nearly 20,000 benchmark and performance studies over 27 years at over 7,000 of the world’s leading companies.

In the following discussion, Strategy and Business Transformation Group includes the results of our North America IP as-a-service offerings, which include our Executive Advisory Programs and Benchmarking Services, and our Business Transformation Practices (S&BT). ERP, EPM and Analytics Solutions includes the results of our North America Oracle EEA and SAP Solutions Practices (EEA). International includes results of our S&BT and EEA Practices primarily in Europe.

COVID-19 Pandemic Impact on Our Business

The level of revenue we achieve is based on our ability to deliver market leading services and solutions and to deploy skilled teams of professionals quickly. Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. In the first quarter of 2021, our revenue before reimbursements and diluted earnings per share grew when compared to the fourth quarter of 2020, reflecting a continuation of improved economic conditions. However, any reversal of these trends or a prolonged economic downturn as a result of the COVID-19 pandemic or otherwise, weak or uncertain economic conditions or similar factors could adversely affect our clients’ financial condition which may further reduce our clients’ demand for our services.

We are actively managing our business to respond to the impact of the COVID-19 pandemic. We are generally following the requirements and protocols published by the U.S. Centers for Disease Control and the World Health Organization, and state and local governments.

In light of the evolving health, social, economic and business environment, governmental regulations or mandates, and business disruptions that could occur, the potential impact that the COVID-19 pandemic could have on our financial condition and operating results remains highly uncertain.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, our results of operations(in thousands and unaudited):

Revenue. We are a global company with operations located in the United States and Western Europe. Our revenue is denominated in multiple currencies, primarily the U.S. Dollar, British Pound and Euro, and as a result is affected by currency exchange rate fluctuations. The impact of currency fluctuations did not have a significant impact on comparisons between the first quarter of 2022 and the comparable period of 2021. In this MD&A, we discuss revenue based on geographical location of engagement team personnel.

The following table sets forth revenue by group for the periods indicated (in thousands):

Our Company total revenue increased 19%, to $75.7 million in the first quarter of 2022, as compared to $63.5 million in the same period of 2021. Our revenue before reimbursements and reimbursable expenses were both affected from the economic disruption of the COVID-19 pandemic and as we transitioned to a remote service delivery model throughout the U.S. and Europe. In the first quarter of 2022 one customer accounted for 7% of our total revenue. In the first quarter of 2021, no customer accounted for more than 5% of our total revenue.

S&BT total revenue was $30.0 million during the first quarter of 2022, as compared to $25.8 million in the same period of 2021, reflecting the continued sequential growth since the second quarter of 2020, which includes strong growth from our research advisory offerings.

EEA total revenue was $38.0 million during the first quarter of 2022, as compared to $32.2 million in the same period of 2021, primarily driven by the large ERP and EPM Oracle engagements and continuing growth of our OneStream implementation practice, partially offset by the transition of large SAP year end engagements.

Hackett international total revenue increased 39% in the first quarter of 2022, as compared to the same period in 2021, primarily due to U.S. driven global engagements and strong Hackett Institute sales. The Company’s international total revenue accounted for 10% and 9% of Company total revenue during the first quarters of 2022 and 2021, respectively.

Reimbursements as a percentage of Company total revenue were 0.7% and 0.1% during the first quarters of 2022 and 2021, respectively. Reimbursements are project travel-related expenses passed through to a client with no associated operating margin. The low level of reimbursements in both periods is directly attributable to the decreases in travel requirements resulting from the COVID-19 pandemic. At this time, due to the immergence of the hybrid operating model, we do not expect reimbursements to return to pre-pandemic levels.

Cost of Service. Cost of service consists of personnel costs before reimbursable expenses, which includes salaries, benefits and incentive compensation for consultants and subcontractor fees, acquisition-related cash and stock compensation costs, non-cash stock compensation expense, and reimbursable expenses which are travel and other expenses passed through to a client and are associated with projects.

Personnel costs before reimbursable expenses, increased 15%, to $47.3 million, for the first quarter of 2022 from $41.2 million in the same period of 2021. The higher costs were primarily a result of hiring activities and increased utilization of subcontractors to support revenue growth, as well as increases in incentive compensation accruals commensurate with Company performance. Personnel costs as a percentage of total revenue were 63% for the first quarter of 2022 and 65% for the first quarter of 2021.

Non-cash stock compensation expense, included in personnel costs before reimbursable expenses was $1.7 million for the first quarter of 2022, as compared to $1.6 million for the same period of 2021.

Acquisition related non-cash stock compensation expense, included in personnel costs before reimbursable expenses, was $4 thousand and $248 thousand in 2022 and 2021, respectively, primarily related to equity issued in relation to acquisitions.

Selling, General and Administrative Costs (“SG&A”). SG&A primarily consists of salaries, benefits and incentive compensation for the selling, marketing, administrative and executive employees, non-cash compensation expense, amortization of intangible assets, acquisition related costs and various other overhead expenses.

SG&A costs increased 7%, to $14.4 million, for the first quarter of 2022, as compared to $13.4 million for the same period in 2021. This increase is primarily due to increased incentive compensation accruals commensurate with Company performance. SG&A costs as a percentage of total revenue were 19% and 21% during the first quarters of 2022 and 2021, respectively.

Non-cash stock compensation expense, included in SG&A, was $0.9 million for the first quarter of 2022, as compared to $0.7 million for the same period of 2021. The increase is due to higher incentive compensation accruals commensurate with Company performance.

Amortization expense, included in SG&A, was $0.1 million in the first quarter of 2022, as compared to $0.3 million in the same period in 2021. The amortization expense relates to the amortization of the intangible asset acquired in our acquisitions and the buyout of our partner’s joint venture interest in the CGBS Training and Certification Programs in 2017. The intangible assets related to the acquisitions will continue to amortize until the end of the year.

Income Taxes. During the first quarter of 2022, we recorded $2.9 million of income tax expense related to certain federal, foreign and state taxes which reflected an effective tax rate of 22%. In the first quarter of 2021, we recorded $2.5 million of income tax expense related to certain federal, foreign and state taxes which reflected an effective tax rate of 28%.

Liquidity and Capital Resources

As of April 1, 2022, and December 31, 2021, we had $47.8 million and $45.8 million, respectively, classified in cash on the consolidated balance sheets. We currently believe that available funds (including the cash on hand and funds available for borrowing under our credit facility) and cash flows generated by operations will be sufficient to fund our working capital and capital expenditure requirements, including working capital, debt payments, lease obligations and capital expenditures for at least the next twelve months and beyond. We may decide to raise additional funds in order to fund expansion, to develop new or further enhance products and services, to respond to competitive pressures, or to acquire complementary businesses or technologies. There is no assurance that additional financing would be available when needed or desired. Our cash requirements have not changed materially from those disclosed in Item 7 included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2021.

The following table summarizes our cash flow activity (in thousands):

Cash Flows from Operating Activities

Net cash provided by operating activities was $6.1 million during the first three months of 2022, as compared to $5.9 million during the same period in 2021. In 2022, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items, partially offset by the decrease in accrued liabilities and other accruals primarily due to the payout of the 2021 incentive compensation payments. In 2021, the net cash provided by operating activities was primarily due to net income adjusted for non-cash items and an increase in contract liabilities and income taxes payable, partially offset by an increase in accounts receivable and contract assets and a decrease in accrued liabilities and other accruals resulting from the payout of 2020 incentive compensation payments.

Cash Flows from Investing Activities

Net cash used in investing activities was $1.0 million during the first three months of 2022, as compared to $0.5 million during the same period in 2021. During both periods, cash flows used in investing activities primarily related to investments for the development of our Quantum Leap benchmark technologies. The investing activities in 2022 also included purchases of computer equipment.

Cash Flows from Financing Activities

Net cash used in financing activities was $3.1 million and $3.7 million during 2022 and 2021, respectively. The usage of cash in the first three months of both 2022 and 2021 primarily related to the repurchase of $3.1 million and $3.7 million, respectively, of the Company’s common stock.

As of April 1, 2022, we did not have any outstanding borrowings under our revolving line of credit (the “Revolver”), leaving us with a capacity of approximately $45.0 million. See Note 7, “Credit Facility,” to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.

As of April 1, 2022, our exposure to market risk related primarily to changes in interest rates and foreign currency exchange rate risks.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to the Revolver, which is subject to variable interest rates. Under our current credit agreement which expires in November 2022, he interest rates per annum applicable to loans under the Revolver will be, at our option, equal to either a base rate or a LIBOR rate for one-, two-, three- or nine-month interest periods chosen by us in each case, plus an applicable margin percentage. A 100-basis point increase in our interest rate under our Revolver would not have had a material impact on our results of operations for the quarter ended April 1, 2022. Upon renewal of our credit agreement in November 2022, the interest rate will change from LIBOR to a different benchmark index, which is yet to be determined.

Exchange Rate Sensitivity

We face exposure to adverse movements in foreign currency exchange rates as a portion of our revenue, expenses, assets and liabilities are denominated in currencies other than the U.S. Dollar, primarily the British Pound, the Euro and the Australian Dollar. These exposures may change over time as business practices evolve.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control Over Financial Controls

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For a discussion of our potential risks and uncertainties, see the risk factor below and the information under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”).

There have been no material changes to any of the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.